What You Should Be Doing With Your New Bonus

It seems that every day there is a new company announcing one-time bonuses for select employees due to the windfall from the Tax Cuts and Jobs Act. Depending on your point of view, the tax cuts are already creating sustained wealth, or they are nothing more than a publicity stunt driving a short-lived rally.

After the tax bill was signed, many companies began giving their employees bonuses. A trend that had dual purposes. Some were merely giving back their expected savings, while others were actually trying to curry favor with the administration for bonuses that were already in the works. After a closer look, the growing trend of corporate generosity may actually be chalked up to a variety of other factors.

The unemployment rate is at the lowest rate since the dot-com bubble, which is starting to create competition for employees - driving employers to provide better benefits and more competitive pay. In addition, giving back to your employees is smart corporate policy. For example, if you give a Walmart employee more money to spend, then couple that with the employee discount, and the deductibility of the bonus, most of what Walmart gives their employees will probably circle right back to their corporate coffers.

Those against corporate tax reduction argue that companies will just make more money and the average American, other than in their 401(k), will not benefit. The contrarian in me says, if it really is trickle-down economics at work, why give a one-time bonus rather than a $1,000 raise. After all, corporate tax breaks are permanent. If I were sitting on a corporate board, I would certainly vote for a $1,000 bonus because a $1,000 raise over the next 20 years would cost significantly more.

One thing we know for sure is that between temporary corporate generosity, and temporary tax breaks, now more than ever is the time to be smart with the windfall. A recent Federal Reserve study found that 50% of those surveyed had less than $400 in their savings accounts. Another survey by personal finance website Bankrate.com found that 39% of Americans have less than $1,000 in an emergency fund. At a time when, according to the Bureau of Economic Analysis, the American household savings rate stands at 2.4% of disposable income, the lowest rate in over a decade, it’s time to take that bonus or tax break and save it, not spend it. Recent history has shown us that periods of low savings precede market crashes (think back to right before the dot-com bubble and the housing crisis).

The administration’s chief economic advisor, Gary Cohn said, that “If we allow a family to keep another $1,000 of their income…They can renovate their kitchen. They can buy a new car. They can take a family vacation. They can increase their lifestyle.” That quote made for some great comedy on the late-night talk show circuit, but I would not heed his advice. Instead, you should take your bonus and finally add it to your net worth and future financial security.

It’s time to be smart. Remember, all this new-found money is temporary, save it wisely.

John E. Girouard is the author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research, and an Investment Advisor Representative of Capital Investment Advisors, in Georgetown D.C.